The doctor tells Ms. Lonely the grim news: Her Chihuahua, Tiny Tim, needs costly, life-saving surgery. You present several payment options, but Ms. Lonely insists she can't pay. It's another appointment where sad eyes on both ends of the leash implore you to offer care they can't afford.

While it's impossible to help every client and pet in need, you can manage some requests with a compassionate care fund. It allows you to establish criteria for who you'll help and how. There's the easy way and the tax-exempt approach. Here's a quick review of both.

Option 1: Do it yourself

6 ways to pay

The simplest approach designates money for pet owners who request assistance. The practice owners may contribute practice funds, but your account can grow faster if you involve others—and it's an opportunity to rally your clients, team members, and friends around a good cause. Most clinics collect money through client and team member donations and targeted fund-raising events. You must report money collected as taxable practice income, but the cost of labor and supplies used while caring for recipient patients are normal, deductible operating expenses.

Remember, clients and team members who contribute to the fund can't deduct their donations as charitable contributions for income tax purposes, since your practice and the fund aren't qualified charities under U.S. tax law. However, this fund's simplicity makes it the logical choice for practices that infrequently encounter these situations.

Option 2: Get friendly with Uncle Sam

How much are you giving away?

Create a 501(c) (3) charity under U.S. tax law granting exemption from federal income tax to qualifying nonprofit organizations. Your nonprofit organization collects, manages, and disburses the charitable funds. State law governs the creation and management of this entity, so procedures and paperwork vary from state to state. 501(c) (3) organizations must meet strict guidelines about soliciting and spending money for a qualified charitable purpose. Having tax-exempt status means there would be no income tax due on money that you receive in donations or most fund-raising activities. An added benefit: Any contributions to the charity are generally deductible for federal income tax purposes.

If you wish to form a true nonprofit organization, you must develop a mission statement, select a board of directors, file legal paperwork with your state, and submit a lengthy application to the Internal Revenue Service (IRS). The IRS web site,
http://www.irs.gov/, outlines the steps to get started. Look for IRS Publication 557, Tax Exempt Status for Your Organization, which explains the pre-application process and filing requirements, application procedure, and annual reporting requirements. Also obtain Form 1023, Application for Recognition of Exemption (the application), and its related instructions. Because rules for forming and maintaining a 501(c) (3) organization are complex and vary state to state, it's best to seek local legal and tax advice.